Opening Position
May 2005
After the Federal Reserve announced that interest rates would rise a quarter point to 2.75%, the markets fell sharply. Given that prior to that point, the equity markets were rising and that the rate hike had been anticipated, why did the markets fall after the announcement? Was it the "buy the rumor, sell the news" idea that led market participants to sell, or was it something else? In this case, it is my guess that -- even though the Fed stated that the rate increase was "measured" -- the sharp fall was heavily weighted toward the possibility of more aggressive rate hikes in the future. This, of course, means that we can expect inflationary growth in the not-so-distant future.
However, I seem to recall a market not long ago that was rallying on the expectation of a strong growth and low inflation. Why, then, the sudden turn? Needless to say, the markets weren't going through the best of times prior to the rate hike announcement. US government bond yields were rising, oil prices were rising, and then there was the threat of downgrading General Motors (GM) to junk bond status. All these factors contributed to the slide in the market. And all this occurred just after the markets appeared to be in a rally mode.
But having analyzed the markets over the years, I really shouldn't view anything that happens as a big surprise. Markets go up, reach a peak, and start falling. Perhaps it's just a short-term correction, or perhaps they will slide further till they hit a trough. Is there any way of knowing for sure?
The secret may lie in the study of cycles. After analyzing charts going back to the 19th century, Cycles News & Views newsletter publisher Tim Wood has been able to discern the cyclical behavior of markets, gleaning that cycles are similar to fractals in that cycles lie within cycles. Read this month's STOCKS & COMMODITIES interview to find out how Wood ascertains when markets have topped or bottomed. After all, isn't that something we would all like to do? Our feature article, "Cycles In Time And Money" by Stuart Belknap, starting on page 28, discusses an index you can apply to the markets. Who knows? Perhaps combining this index with Wood's cycles theory may open the doors to your understanding of what really happens in the markets.
And that is critical because, from the way things are looking, we can
surely expect more volatility in the markets.
Jayanthi Gopalakrishnan,
Editor
Originally published in the May 2005 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2005, Technical Analysis, Inc.
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